Are REITs best way to have real estate exposure?

The calendar year 2020 was a mixed bag for global REITs but Indian REITs too gave a well-given resilient performance of commercial real estate (CRE). While the outlook for global REITs is favourable in the light of 3-5 percentage points (ppt) spread over global G-Sec yields, the Indian REITs look promising, provided a favourable outlook for technology & BFSI sectors (approximately 50 per cent absorption over CY14-Q1CY20). Flexibility in lease arrangements, increased use of technologies and de-densification, which are driving demand higher by 5 per cent to 45 per cent, are some of the notable trends to watch. Further, it has now been almost two years since we had the first real estate investment trust (REIT) in India. Though not long but it makes more sense to have a look at its performance. Presently, we have two REITs available in the market namely, Mindspace REIT and Embassy REIT.  

As you might have witnessed in the above graph, since its (Embassy REIT) launch, it has performed better than S&P BSE Realty Index. And although presently, its performance against the realty index seems to fade off, in terms of risk, Embassy REIT is far better than realty index. The standard deviation of Embassy REIT is 0.11 and that of S&P BSE Realty Index, it’s 0.17. We are not including Mindspace REIT into comparison due to limited data. Having said, let us look at the returns of Embassy REIT, Mindspace REIT and S&P BSE Realty Index. Here we have taken rolling returns of one month, three months, six months and one year.

As we can see from the table above, in one and three-month rolling period, REITs has not been able to outperform S&P BSE Realty Index. Though in the three-month rolling period, Mindspace REIT is an exception. However, in a slightly longer timeframe of six-month and one-year, REITs (Embassy REIT) outperforms S&P BSE Realty Index. This gives a hint that in the long-term, REITs proves to be better than S&P BSE Realty Index.

Therefore, REITs indeed can prove to be a better opportunity for retail as well as HNI investors to add more diversification to their wealth creation portfolio. Having said, still there aren’t many options available in this space. Besides, the available data is not so long-term to judge the stability and the growth of REITs. Hence, limited exposure to REITs is advised.